In re Szczyporski

• Decision Date: 31 March 2021
• Docket Number: Civil No. 2:20-cv-03133,Bankruptcy No. 19-14584
• Citation: 531 F.Supp.3d 934
• Parties: IN RE: Robert SZCZYPORSKI, Debtor
• Court: U.S. District Court — Eastern District of Pennsylvania

531 F.Supp.3d 934

IN RE: Robert SZCZYPORSKI, Debtor

Bankruptcy No. 19-14584

Civil No. 2:20-cv-03133

United States District Court, E.D. Pennsylvania.

Filed March 31, 2021

Sergey Joseph Litvak, West Windsor, NJ, for Debtor.

Kyle Lamar Bishop, U.S. Dept. of Justice - Tax Division, Washington, DC, for Internal Revenue Service.

OPINION

Joseph F. Leeson, Jr., United States District Judge

I. INTRODUCTION

Robert Szczyporski and Bonnie Szczyporski ("Debtors") appeal from the order entered by the United States Bankruptcy Court for the Eastern District of Pennsylvania on June 23, 2020, overruling their objection to a portion of the Internal Revenue Service's ("IRS") priority claim for a shared responsibility payment ("SRP") under the Affordable Care Act ("ACA"), 42 U.S.C. §§ 18001 - 18122, which is assessed on behalf of taxpayers who do not maintain health insurance for at least a month in any given tax year. Upon de novo review, the Bankruptcy Court's decision is affirmed.

II. BACKGROUND

In 2018, Robert Szczyporski earned enough income to require him to file an income tax return, but had not obtained health insurance for that year. Consequently, the IRS assessed an SRP against him in the amount of $927.

On July 19, 2019, Debtors jointly filed a Chapter 13 bankruptcy case in the United States Bankruptcy Court for the Eastern District of Pennsylvania. The following month, the IRS filed a proof of claim under 11 U.S.C. § 507(a)(8) for taxes in the total amount of $18,027.08, which included the SRP of $927 for the 2018 tax year. The IRS listed the SRP as an excise tax and the remaining amounts as income taxes. Debtors filed an objection to this claim, asserting that the SRP claim is in fact a "penalty" and does not qualify for priority treatment under bankruptcy law. A hearing on the claim was not held until after the Chapter 13 plan was confirmed on February 12, 2020. No later than March 4, 2020, when the IRS filed a brief in response to Debtors’ objection to the claim, it alleged that the SRP was either an excise or an income tax.

On June 23, 2020, the bankruptcy court issued an Opinion and Order overruling Debtors’ objection and holding that the IRS's claim was entitled to priority under 11 U.S.C. § 507(a)(8). The bankruptcy court concluded that the ACA's SRP is a tax under the Bankruptcy Code. The court further determined that the SRP must be either an income tax or excise tax and that it was unnecessary to decide which because both are given priority treatment under the Bankruptcy Code. Debtors timely appealed this decision.

The question in this appeal is whether the ACA's SRP constitutes a penalty or a tax for bankruptcy purposes. If it is a tax, the next question is whether it is entitled to priority treatment. The facts are not in dispute.

III. LEGAL STANDARDS

A. Review of a Bankruptcy Appeal

On appeal, a district court reviews a Bankruptcy Court's findings of fact applying a "clearly erroneous" standard of review. See Am. Flint Glass Workers Union v. Anchor Resolution Corp. , 197 F.3d 76, 80 (3d Cir. 1999). A district court reviews the Bankruptcy Court's legal determinations de novo. See Sovereign Bank v. Schwab , 414 F.3d 450, 452 (3d Cir. 2005).

B. Determination of Whether an Exaction is a "Tax"

"The term ‘tax’ is not defined in the bankruptcy code. The definition of tax for bankruptcy priority purposes is found exclusively in federal case law." In re Sacred Heart Hosp. , 212 B.R. 467, 471 (E.D. Pa. 1997). The Supreme Court held that "[g]enerally speaking, a tax is a pecuniary burden laid upon individuals or property to support the Government." New Jersey v. Anderson , 203 U.S. 483, 487, 27 S.Ct. 137, 51 L.Ed. 284 (1906). See also New York v. Feiring , 313 U.S. 283, 285, 61 S.Ct. 1028, 85 L.Ed. 1333 (1941). "Both the Supreme Court's opinion in Feiring and the subsequent decisions by the lower courts predominantly focus on two aspects of the definition of a tax: [1] involuntariness, i.e. that the charge is imposed regardless of the consent of the individual, and [2] the public purpose." See In re Sacred Heart Hosp. , 212 B.R. at 472 (internal citations omitted). Additional specific factors have been identified in what is referred to as the Lorber-Suburban analysis: (1) whether the obligation is an involuntary pecuniary burden, regardless of name, laid upon individuals or property; (2) whether the obligation is imposed by, or under authority of, the legislature; (3) whether the obligation is for public purposes, including the purposes of defraying expenses of government or undertakings authorized by it; (4) whether the obligation is imposed under the police or taxing power of the state; (5) whether the obligation is universally applicable to similarly situated entities; and (6) whether granting priority status to the government will disadvantage private creditors with like claims. See Yoder v. Ohio Bureau of Workers' Comp. (In re Suburban Motor Freight) , 998 F.2d 338, 341 (6th Cir. 1993) ; In re Lorber Indus. of Cal., Inc. , 675 F.2d 1062, 1063 (9th Cir. 1982) (internal citations omitted).

In CF&I , the Supreme Court explained that the court must look beyond labels and conduct a functional analysis to determine if an exaction is a tax or a penalty for bankruptcy purposes. See United States v. Reorganized Cf&I Fabricators of Utah , 518 U.S. 213, 224, 116 S.Ct. 2106, 135 L.Ed.2d 506 (1996) (" CF&I ") (holding that the court must make "a functional examination" of whether claims under 26 U.S.C. § 4971(a), which impose a 10 percent "tax" on any accumulated funding deficiency of certain pension plans, is a tax within the meaning of 11 U.S.C. § 507(a) or a penalty). In conducting this examination, the court considers whether the exaction looks and works like a tax or a penalty by looking at, inter alia , how it is calculated and enforced. See id.

The Third Circuit Court of Appeals expanded on this functional examination approach a few years later. In In re United Healthcare Sys. , the court stated that "[w]hile the Lorber-Suburban analysis is helpful in executing this examination, we do not believe that its six factors should constrain our inquiry ... [as] it may prove too rigid to provide an effective analysis of every potential obligation and thus could preclude consideration of important characteristics." Reconstituted Comm. of Unsecured Creditors of the United Healthcare Sys. v. State of N.J. DOL (In re United Healthcare Sys.) , 396 F.3d 247, 255 (3d Cir. 2005) (citing In re Suburban Motor Freight , 998 F.2d at 341 and In re Lorber Indus. of Cal., Inc. , 675 F.2d at 1063 ). Rather, "a functional examination that balances the characteristics of the obligation at issue will signal whether an obligation is a tax for bankruptcy purposes, and that [ ] examination should be flexible enough to allow for consideration of any relevant factor." In re United Healthcare Sys. , 396 F.3d at 255 (explaining, "our more flexible approach allows us to consider the characteristics of the obligation in light of the evolving treatment of priority claims under the Bankruptcy Code").

IV. ANALYSIS

A. The SRP is a tax.

The Supreme Court conducted a "functional approach" of the SRP, which is the exaction at issue here, and concluded that it is a "tax" for constitutional purposes. See Nat'l Fed'n of Indep. Bus. v. Sebelius , 567 U.S. 519, 566, 132 S.Ct. 2566, 183 L.Ed.2d 450 (2012) (holding that "the shared responsibility payment may for constitutional purposes be considered a tax, not a penalty"). The Court determined that the "exaction the Affordable Care Act imposes on those without health insurance looks like a tax in many respects." See Sebelius ,¹ 567 U.S. at 563, 132 S.Ct. 2566. The Court reasoned that the SRP "is paid into the Treasury by ‘taxpayer[s]’ when they file their tax returns." See Sebelius , 567 U.S. at 563, 132 S.Ct. 2566 (citing 26 U.S.C. § 5000A(b) ). Also, for "taxpayers who do owe the payment, its amount is determined by such familiar factors as taxable income, number of dependents, and joint filing status." Id. (citing 26 U.S.C. §§ 5000A(b)(3), (c)(2), (c)(4) ). The Court explained that "[t]his process yields the essential feature of any tax: It produces at least some revenue for the Government." Id. at 564, 132 S.Ct. 2566. The Court further reasoned that the SRP does not have the defining characteristics of a penalty. See Sebelius , 567 U.S. at 564-65, 132 S.Ct. 2566 (considering the "three practical characteristics ... that convinced [the Court] the ‘tax’ was actually a penalty" in Drexel Furniture (citing Bailey v. Drexel Furniture Co. , 259 U.S. 20, 37, 42 S.Ct. 449, 66 L.Ed. 817 (1922) ).

First, for most Americans the amount due will be far less than the price of insurance, and, by statute, it can never be more, ... unlike the ‘prohibitory’ financial punishment in Drexel Furniture . Second, the individual mandate contains no scienter requirement. Third, the payment is collected solely by the IRS through the normal means of taxation--except that the Service is not allowed to use those means most suggestive of a punitive sanction, such as criminal prosecution. See § 5000A(g)(2).

Id. at 566, 132 S.Ct. 2566 (internal citations omitted).

Debtors contend that Sebelius is not applicable here because it did not address the SRP in the context of a bankruptcy case. The Government argues, on the other hand, that Sebelius is dispositive of the issue.

This Court agrees with the Government and the bankruptcy court below that Sebelius is dispositive. The Supreme Court, even though outside of the bankruptcy context, conducted a functional examination of the SRP and concluded that it is a tax. See Sebelius , 567 U.S. at 563-66, 132 S.Ct. 2566. This examination, of which the most notable findings are listed above, is the same examination required in the bankruptcy context pursuant to CF&I .² Further, the Sebelius Court specifically relied on CF&I to distinguish between a tax and a penalty. See id. at 567, 132 S.Ct. 2566 ("In distinguishing...